CRA indicates that it can be acceptable to cap the kilometres for which a car allowance is paid

An employer pays a fixed per-kilometre allowance to its employees for their motor vehicle use in the course of employment – except that if the kilometres driven during a particular period exceed a cap, no allowance is paid for the excess kilometers. Is such allowance unreasonable by virtue of s. 6(1)(b)(x), which deems a motor vehicle allowance not to be reasonable

where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment [?]

CRA responded:

In general … the mere presence of a capping policy such as the one at issue here is not sufficient to conclude that an allowance paid to an employee is deemed not to be reasonable by virtue of paragraph 6(1)(b)(x). …

An allowance not being deemed to be unreasonable by s. 6(1)(b)(x) does not necessarily mean it is reasonable for purposes of s. 6(1)(b)(vii.1), which generally excludes a reasonable allowance for employment driving from inclusion under s. 6(1)(b). CRA went on to state:

The situation described in your request is unique in that it presents the possibility that an employee may, for a portion of the total distance travelled in the performance of employment duties, receive no allowance. In such a case, the allowance may not be high enough in relation to the expenses that the employee is expected to incur in a specific situation and thus may not be reasonable for the purposes of subparagraph 6(1)(b)(vii.1). If so, the allowance would be a taxable benefit that the employee would have to include in employment income under paragraph 6(1)(b).

It seems odd that a car allowance would be taxable because it is unreasonably low. Maybe you should advise your employer to increase your allowance to reduce tax risk.

Neal Armstrong. Summary of 5 March 2021 External T.I. 2017-0713041E5 F under s. 6(1)(b)(x).